Hornby has raised its prices to cope with the slump in sterling, and warned today that they might be increased again if the pound fails to recover.

The toys group, which makes model railways, Scalextric sets and Corgi cars, said it suffered disappointing sales in the run-up to Christmas. Its shares slid by over 12%, to 84p, as it admitted current-year profits would be at the low end of City expectations.

It blamed a fall in orders from major customers during November and early December, as toy retailers braced themselves for one of the most challenging festive periods in decades. Although demand picked up as Christmas drew closer, beating last December's sales, it came too late to reverse the damage.

A Hornby spokesman said the sales decline had been "across the board". One highlight was Hornby's new Airfix model of Lewis Hamilton, which sold out following his success in the formula one world championship.

The company raised its prices in an attempt to offset the impact of the weak pound, which hit a 23-year low against the dollar last week. This will erode Hornby's profit margins in the months ahead, unless sterling rallies.

"We are considering a number of measures to mitigate such erosion including, if appropriate, further price increases later in the year," Hornby said.

Hornby has pursued an expansion drive in recent years, buying Airfix and Corgi. Its chairman, Neil Johnson, said the company was performing well following a "difficult" pre-Christmas period. "Strong demand in the early weeks of 2009 gives us further confidence that our hobby-based businesses will continue to demonstrate their defensive characteristics in what is likely to continue to be a challenging economic climate," he said.